Should You Buy These 4 Activewear Stocks?

Hanesbrands' success in activewear might make it a better investment than giants Nike, Under Armour, or Lululemon.

Apr 29, 2014 at 1:30PM

Nike (NYSE:NKE), Under Armour (NYSE:UA), lululemon athletica (NASDAQ:LULU), and now Hanesbrands (NYSE:HBI) are all part of the activewear segment. And besides Hanesbrands, all have traded lower since March. Therefore, with each company continuing to grow while valuation multiples decline, is there value within these four companies?

Different but similar
These four companies trade in the same space but are very different in operating approach. Nike is the worldwide leader of activewear, but the root of its business is in shoes, where the Nike and Jordan brands command an impressive 62.6% of the sneaker business in the U.S.

Under Armour is known for its sports clothing and technology to keep the body cool, hydrated, and odor-free. However, the company has since evolved into offering clothing for all consumers and has built a fast-growing shoe business as well.

Lululemon is known for its women's yoga pants but in recent years has expanded its products to include clothing accessories, jackets, and even a men's line.

Lastly, Hanesbrands isn't usually a company that comes to mind in discussing activewear. However, its fastest-growing segment is conveniently called Activewear; it is not only the fastest-growing business for Hanesbrands but also the most profitable.

Finding value
Although we're not comparing apples to apples, with each company having their own edge in the industry, we can still compare and contrast key metrics to identify any value within the space, or the best value.

Company

P/E Ratio

Forward P/E Ratio

Operating Margin

Expected Revenue Growth

Nike

25

21.7

13.5%

9.5%

Under Armour

65

42

11.3%

24.5%

Lululemon 

24

20.7

25.7%

13%

Hanesbrands

24

15

12.8%

9.9%

Source: Yahoo! Finance.

For retail investors, the P/E ratio is one of the most tracked metrics for finding investment opportunities. However, since investing is the art of predicting the future, a forward P/E ratio might be more useful, showing investors both expected bottom-line growth and a stock's premium relative to future expectations. Then, operating margins are quite useful in identifying companies that might have room for profit improvements. Lastly, expected revenue growth is one of the key drivers in determining how the market values a company.

With that said, Nike, Under Armour, and Hanesbrands all have similar multiples and growth. But in looking at forward P/E ratios, it's clear that Hanesbrands is expected to see significant margin improvements; its operating profit increased 34% in the first quarter versus revenue growth of just 12%.

Nike is clearly the most popular name in the industry; but at 21.7 times forward earnings with expected growth of 9.5%, it's the most expensive and slowest growing.

Lululemon looks to have a good ratio of growth and value. However, its operating margin relative to the industry is a bit alarming. Furthermore, Lululemon saw its operating margin decline in each of the last two years, due to both competition and increased costs. Therefore, investors must wonder if margins are sustainable; and if not, implied metrics may not be accurate.

Under Armour is nearly three times more expensive than Hanesbrands but growing only 2.5 times faster. Typically, if a company has twice the premium of a peer, then investors should want twice the growth to imply equal value.

Also, let's not forget the fact that shares fell 8% on slowed growth fears after Under Armour announced earnings. Essentially, if a company grows 36% in the first quarter and then guides for 24% growth for the full year, then 30%-plus growth will not occur. This is a new concept for Under Armour shareholders and might mean more downside pressure to better price the stock.

Final thoughts
While none of these companies appears to be particularly a bad value, and all are growing, Hanesbrands looks especially intriguing, and conveniently because of its sportswear segment.

Currently, Hanesbrands is benefiting from the acquisition of Maidenform, which drove 15% growth in the innerwear segment during the first quarter despite a 6% decline without the addition of Maidenform. Therefore, Hanesbrands' business minus the acquisition would not see 10% growth.

However, the acquisition of Maidenform and the success of its activewear segment are driving growth, while the latter drives margins higher. Specifically, Activewear accounted for 29% of the company's first-quarter revenue but 45% of its operating profit. Therefore, as the segment grows larger, the company's margins should increase, which consequently means higher profits and a lower P/E ratio. Hence, it is this fact, and Hanesbrands' discount to forward earnings, that makes it the best value in the segment.

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Brian Nichols owns shares of Under Armour. The Motley Fool recommends lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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